Thanks for reading my Diary today.

Tomorrow I will start with "Levels."

Enjoy the evening.

* This is classic
I have rarely seen such bullish unanimity as on Disney (DIS) .
On cue, the company misses on both top and bottom line. (Both were large misses to expectations).
The nature of the misses were exactly the reason I was short -- up until a few weeks ago.
Disney's shares are down around 5%.
And I guarantee you that very few of the "talking heads" will own up to this.

With the yield on the 10-year U.S. note approaching 1.72% (-2 bps on the day) -- the economic message delivered is not a healthy one.

Some of my financial holdings are delivering their 2Q19 10Qs today.

I will comment if appropriate.

First up is Goldman Sachs (GS) .

One of the more interesting items was that the brokerage experienced only seven loss days. On the other hand there were few outsized trading revenue days.

Another item was the slight decrease in the company's banking transaction backlog.

Otherwise, nothing really new in their 10Q.

Volatility is now on the rise and a terrific two way trading backdrop probably lies ahead.
The S&P Index is now 100 handles (!) above the implied level when futures dove by 60 handles + after the close yesterday - as China was named a currency manipulator.
Look for more active trading ideas from me in the next few weeks.

I have not made a trade yet today but my Sell pads have been taken out of the desk.
I will give the market a bit more berth before reshorting the Indices.
But that is my intention!
I remain net long (small).

My pal Larry Kudlow appeared on CNBC this morning.

Let's go to the tapes!

See here and here.

Here are some of Larry's quotes (and my responses in parentheses):

Kudlow: "The American economy is booming... The US consumer is in great shape." (As described in my opener  the manufacturing recession is now seeping into the services sector. Our economy is not in great shape, achieving only +2% growth despite a near generational low in interest rates. Look at the forward indicators of personal consumption not in the rear view mirror. Factory overtime has just plunged to an eight year low. There is no growth in average hours worked in 3Q2019. Dr. Copper is -15% in price over the last four months. The CRB metals have been cut in quarter from the highs. These indicators are indicating a peak and not a boom).

Kudlow: "The economic burden of these tariffs are falling almost 100% on China. Their economy which is deteriorating... the Chinese economy is crumbling... The American economy is strong, theirs is not."
(The burden of tariffs is falling on US consumers and US corporations. Stated growth, in real terms is +6% in China but only +2-2.5% in the US. Even if we shave off a couple of points of growth as fabrication, we are not growing as rapidly as China, who's economy is certainly not crumbling).

Kudlow: "China is not the economic power it was twenty years ago." (While China faces economic challenges, this statement is patently absurd. China's economy is about seven times larger than it was two decades ago and its growth rate during that period has exceeded that of the US by a factor of 3-4).

Kudlow: "President Trump says if we make good progress on the deal he will be flexible on the tariffs."
(Our relationship with China is as bad as any point in the discussions over the last year).

Kudlow: "The President has a long view." (You can't be serious! The president has shown no patience to approach any problems with a long term vision/delivery - just look at his tweets)

Trade wars (in general) are not easy, as the president suggested more than a year ago.

We are in a form of Cold War with China in a fight for economic hegemony.

There is absolutely no evidence that China is currently prepared to engage in reform of its technology exchange, intellectual property piracy, periodic state sponsored commercial hacking and other key basic internal Chinese practices.

To be sure, these issues are not properly dealt with threats delivered on Twitter or with "us" vs. "them" tactics. The objective of trade policy is to improve our stead and not to launch into a negative sum game which seems to take solace that China is being hurt worse than the U.S. is getting hurt.

Trade talks with China require patience, working with our allies, diplomacy and long term strategy - not "tit for tat" (or false accusations of currency manipulation). (The later claim of manipulation is not grounded in analysis, as was the case during the Clinton Administration when China was intervening in large quantities to push its currency lower and was running a large surplus with the rest of the world - though it might be grounded in the president's latest tweet. The fact is that today China is not running a substantial surplus with the rest of the world nor is it currently intervening in its currency, as its actually trying to prop up its exchange rate).

In my view we are likely entering into a prolonged period of economic, political and financial market instability - with a trade dispute with China in the forefront of that instability.

As Summers suggests, the risks are greater now than at any time in the decade long recovery. Those risks are magnified by the volatility injected every week by some new policy action (not grounded in facts and analysis and exist at a time in which most traditional valuation measures are elevated above the 90 decile.

To use a technical term, the market's advance today doesn't feel too "sporty."
To me, as I mentioned in my opener, is that growth is slowing.
More on this in my next post...

Peter Boockvar says, take a deep breathe:

So the ECB, BOJ, SNB, Riksbank and Danish central bank have negative interest rates but we determine that China is the currency manipulator whose onshore currency is down a whopping 2.7% this year vs the dollar. Anger and pure politics are now driving the approach towards China, certainly not economic logic. If anything, China is doing its best to keep its currency from falling further and thus manipulating it higher. Everyone needs to take a deep breath here as dealing with China is not a NY real estate negotiation where if you bang someone in the head enough they will capitulate.

Anyway, China fixed the midpoint of CNY last night below 7 at 6.9683 and that is why the yuan is rallying which in turn is helping our markets to rebound, along with Europe.

Shifting gears to some economic data, Japan said regular base pay rose .1% y/o/y, a punk figure but after 5 months in a row of declines. Worries about growth, particularly with China, has certainly limited the wage story in Japan. It's another reason why they need as low inflation as possible in order to raise real wages. Bonus pay was higher by .9% y/o/y and maybe that is what helped household spending rise by 2.7% y/o/y in June, above the estimate of up 1.1%. Either that or consumers are buying ahead of the expected VAT hike in October.

With some market calm this morning, the yen is selling off but I want to point out the continued weakness in Japanese bank stocks in response to the further collapse in bond yields over the past few weeks. The Topix bank stock index closed today at a 3 year low as banks are being bled dry by negative rate policy.

European bank stocks yesterday also closed at a 3 yr low but are up a touch today. They are dying as well.

Factory orders in June in Germany did bounce 2.5% m/o/m after a 2% drop in May and that was better than the estimate of up .5%. The improvement was solely led by a nearly 9% rise in non eurozone orders and capital goods as opposed to consumer goods which fell. Bottom line, the weakness in June ebbed but any signs of a notable, sustainable uptick is not close, especially with what happened in July and so far in August with the trade fight. The euro is little changed but bond yields are going more negative with the German 10 yr yield down another 2.5 bps to -.54%.

My average on my iShares 20+ Year Treasury Bond ETF  (TLT) short (as of the close yesterday) was about $134.50.

It is a large position.

Today it grew to a mega large position as I "averaged up."

This is not a trade or a short term rental - it is a long term lease (that I expect to hold for years).

Yesterday and most of last week I have been expanding my Canopy Growth (CGC) long investment position (the stock is on my Best Ideas List).
CGC (+6%) and the other pot stocks should thrive today after the Aurora Cannabis (ACB) revised upward guidance (its shares were +15%) pointed out by my old friend Hendrix in this tweet:

* I have moved from net short to neutral for the short term
* I remain negative for the intermediate term

Friday's tariff announcement set the stage for Monday's market weakness.
However, it is my view that the 10:30 am announcement that the manufacturing recession was seeping into the services sector was materially responsible for the schmeissing (that accelerated in Monday's after hours trading following the "currency manipulation" designation).
Here is what I wrote yesterday morning:

ISM Services Fall to Near 3 Year Low

The all important July ISM services index weakened to 53.7 from 55.1, and that was below expectations of 55.5. It's also the weakest since August 2016. New orders fell to 54.1 from 55.8, also the lowest since August 2016. Backlogs fell 2.5 pts to 53.5 while inventories dropped 5 pts to 50. Export orders, where only some service companies report, was down by 2 pts to 53.5. Employment was the one bright spot, rising 1.2 pts to 56.2 but only after falling by 3.1 pts in the month prior. The six month average is 55.7. Prices paid was down by 2.4 pts to 56.5 after rising by 3.5 pts in June.

Of the 18 industries surveyed, 13 saw growth vs. 16 in June. There were five industries that saw contraction vs. just one in June. With new orders, only 11 industries saw growth vs. 14 in the month prior.

The ISM said what we'd expect: "The non manufacturing sector's rate of growth continued to cool off. Respondents indicated ongoing concerns related to tariffs and employment resources. Comments remained mixed about business conditions and the overall economy."

As Danielle DiMartino Booth and I have suggested over the last few months, the weakness in manufacturing is now showing up in softness in services and thus the entire U.S. economy is getting impacted by the slowdown (along with construction and mining). With respect to the next leg to watch, hiring, we've already seen the initial employer response, cutting worker hours in Friday's payroll report. Hopefully that will be enough because if it's not, layoffs come next.

Here are two related charts provided by Peter Boockvar:

ISM SERVICES

NEW ORDERS

This morning, Danielle DiMartino Booth corroborated my broadening economic concerns that manufacturing weakness has begun to adversely impact the services sector.

My Tactical Strategy

It is my nature to evaluate markets based on reward vs. risk. This is a dynamic process because stock prices are always in a state of flux - the last week has been notable towards that end!

I do not have a concession on investment truth - far from it.

Others use much different approaches - with many basing their decisions on price. But, as you all know by now, I am fundamental and mathematical in my approach.

Different approaches can thrive.

At the same time I don't want to suggest precision in my forecasts (see below) - as Mr. Market can be most impetuous and even unreliable. Machines and algos also tend to exaggerate moves.

It is for that reason (and my four decades in the investment business) that I am less self confident than most - I always see the Cossacks coming over my shoulder! (Hat tip Grandma Koufax)

As stated, I was extremely active yesterday - obviously seeing an opportunity in the steepening of the recent market weakness on Monday.

I covered all my Index shorts in the afternoon at reasonably good prices and I reduced some individual shorts and added to my FANG long holdings, among a number of other moves. (I hadn't anticipated this move over the weekend!)

I like to write that I manage money with a calculator and a contrarian streak. So let's get down to specific expectations...

I made these moves in the belief that we might be entering a lower volume (end of summer) "two way" trading environment into the fall - a broad trading range (in Spy terms) of about $270-$295 (we closed at $283.82, right in the middle of the range) . So, the upside/downside is relatively even. (In S&P terms that is about 2700-2950).

Though the reasons for the recent interest rate drop can be considered a prospective economic negative (implying much slower growth), the downside of "only" 2700 (S&P) is higher than where I was previously - out of respect for a 1.75% 10 year US note (that provides a bit of a cushion - against my anticipated low of 2.25% as expressed in my 15 Surprises For 2019).

In no way am I bullish. Rather, I am responding to the current upside reward vs. downside risk subsequent to a move from $304 to $282 in the Spyders.

As a result, I plan to reshort on a rally towards the upper end base of those range based on many concerns expressed in my Diary over the last few months.

Most importantly, I believe The Fed is Pushing on AString, the global economy and U.S. corporate profits will disappoint, fiscal and monetary policy risks are multiplying, the absence of cooperation of G8 countries (in an increasingly interconnected economic world), the likelihood that the U.S./China trade rift will last for years and that valuations are far too elevated (based on historical metrics).

As well, and as I warned the "market structure" (ETFs and risk parity domination) runs the continued risk that a primary price trend change could result in a series of Flash Crashes or quick market drops (as we witnessed yesterday). Too many are on the same side of the Bullish boat.

With the S&P lower than it was back in late January, 2018, it remains my view that we have already seen an important market top - but be aware that tops are typically multi-year processes. Multiple trading opportunities arise in the interim for the opportunistic.

But as Jim "Capitan" Cramer likes to say, "There is always a bull market somewhere." I favor money center banks and several of the FANG stocks (most notably (GOOGL) which is my Trade of the Week).

I am currently small net long in exposure. (I like where I am now.)

While the continued trade (and now) currency rift were the proximate cause of yesterday's market schmeissing - it was further evidence that the weakness in U..S. manufacturing has begun seeping into the services sector.
This was a concern that Danielle and I have previously highlighted in the last three months:

• While the markets yesterday focused on the yuan devaluation drama, service sector purchasing managers' surveys revealed a more widespread downtown was already unfolding in July; look at this latest round of tariffs as a fire accelerant on a slowing U.S. economy
• July's Business Activity-Employment "inversion" has only been seen to this extent in recession; July's respondents indicated challenge is not labor constraints but faltering demand corroborating Markit's Services Future Activity index's sixth month of deterioration to a series low
• Slower growth in higher-wage jobs pinches aggregate household income which may begin to negatively impact consumer confidence; higher tariffs and falling incomes raise the risk that the weakest retailers will be hard-pressed to survive the all-important holiday season

No artist knows when or if they will compose a timeless piece of music. It's by definition an after-the-fact event. Tom Petty's American anthem "I Won't Back Down" fits that bill. The song was released in April 1989 as the lead single from his first solo album, Full Moon Fever, and reached number 12 on the Billboard Hot 100. Of course, true legends continue to inspire well beyond their time on the charts. As NPR elaborated back in May: "Of all his many, many hit songs, the one that Tom Petty said had the most direct and powerful impact on his fans was "I Won't Back Down"...[Petty] told interviewers that people would come up to him all the time, or would write to him, sharing stories of how this song - with its plainspoken message of resilience and empowerment - helped steer them through difficult times."

Petty's ageless hit has no doubt been added to President Trump's playlist. If Trump had planned to use the additional 10% tariff on China as a negotiating tactic and eventually take it back Indian-giver style, that opportunity is long gone. China has forced Trump to follow through by halting agricultural imports and by allowing its currency to breach the psychologically important '7' level. Now Trump can't back down. But he can keep up the fight. On Monday evening, just before 6:00 pm EST, the U.S. Treasury Department formally designated China as a currency manipulator.

Macroeconomic data will not reflect the market upheaval until September at the earliest, when we start to see August reports. Be that as it may, Monday's service sector purchasing managers' surveys from the Institute for Supply Management (ISM) and from IHS Markit revealed a more widespread downturn was already unfolding in July.

Enter Exhibit A into evidence. The red line above illustrates the ISM Non-Manufacturing Business Activity-Employment spread - a simple gauge of the relationship between revenues and labor costs across the broader economy. As you know, the non-manufacturing sector accounts for an 89 percent share of the U.S. economy and is more labor-intensive than the manufacturing sector.

July's Business Activity-Employment "inversion" has two other historic rivals - October 2001 and January 2008, both of which occurred during recessions. ISM noted that "the non-manufacturing sector's rate of growth continued to cool off. Respondents indicated ongoing concerns related to tariffs and employment resources." It's not about labor capacity issues. It's about a weakening in demand that pre-dates the latest ramp-up in trade war risks.

Companies can't control demand, meaning they can't control revenues. A surprising slowdown manifests in a concurrent ebbing in labor demand. This is depicted in the green series above labeled "higher-wage payroll growth." The industries included in this series have average wages close to and above the national average. It's clear from the trend that there are fewer jobs being generated in the private sector outside of the industries excluded in the calculation - retail, education and health care, leisure and hospitality and "other" services.

Slower growth in higher-wage jobs translates to slower growth in aggregate household income. This deflationary impulse will not make itself clear(er) until we see retail and other consumer spending metrics for the months of July and August later this month and next. But one thing is for sure, the retail sector is vulnerable to more consolidation.

The July National Association of Credit Management report noted that "all eyes will be on August sales and the levels of consumer confidence in the months ahead. If the coming holiday season is a weak one, there will be a lot of retailers in trouble. Many of them are already reeling from the impact of expanded online competition."

As for the service sector's prospects, they appear to be "Free Fallin'," to reference another Tom Petty triumph. The Markit Services Future Activity index fell to a series low in July.Business expectations have downshifted now for six months running, also a record in terms of consecutive deterioration.

As Markit noted, "Optimism is at its lowest ebb since comparable data were first available in 2012 as companies have grown increasingly concerned about the year ahead, fueled by trade war worries and wider geopolitical jitters, as well as growing worries that the economic cycle has peaked."

With neither side backing down in the latest U.S./China trade war volley, at -30 basis points, the three-month/10-year Treasury curve hit fresh cycle lows in Monday's trading. Without a Fed response, investors will be asking, "Where's the bottom?" and traders pondering, "Could the Fed cut intermeeting?"

If Trump had intended to renege on the September 1st tariffs to prevent the economic fallout from expediting sentenced retailers' death marches, he's lost that chance. His presumed negotiating tactic to force the Fed's hand will leave him wishing he could have backed down.

Where do I start with a day like Monday and an after-hours market reversal like Monday night/Tuesday morning?

Fasten your seatbelts.